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SFAS No.
5 Long-term Equity Investments under Equity Method |
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Status |
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Revised by the
Financial Accounting Standards Committee In Taiwan on 22
December
2005 |
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Summary |
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The purpose
of this Statement is to establish accounting standards for long-term
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equity investments under equity
method. |
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When an
investor company holds more than 50% of an investee company’s stock
with |
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voting rights, it generally has
control over the investee company (a subsidiary company), |
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unless there are evidences to indicate
that it does not has control. |
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When an
investor company holds 20% or more of an investee company’s stock
with |
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voting rights, it usually has
significant influence over the operating, financing, and |
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dividend policies of the investee
company (an associate company). |
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When an
investor company holds less than 20% of an investee company’s stock
with |
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voting rights, it usually has no
significant influence over the investee company. |
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However, if any one of the following
situations is met, it is usually evident that the |
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investor company has significant
influence: |
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(a)an investor company’s ownership percentage in an investee
company’s |
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outstanding stock with voting rights is the highest among all the
shareholders; |
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(b)the president of an investee company is assigned by an investor
company; |
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(c)according to a joint venture contract, an investor company has
the right of |
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operation; or |
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(d)other situations indicating that an investor company has
significant influence |
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over an investee company. |
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Long-term
equity investment under equity method |
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An investor
company’s equity investment shall be long-term equity investment
under |
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equity method if any one of the
following conditions is met: |
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(a)an investor company has control over the investee company; |
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(b)an investor company alone holds 20% or more of an investee
company’s stock |
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with voting rights but it does not have control over the investee
company, |
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unless it is evident that the investor company does not have
significant |
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influence over the investee company; or, |
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(c)even though an investor company holds less than 20% of an
investee |
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company’s stock with voting rights, but it has significant influence
over the |
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investee company. |
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Exceptions
to using the equity method for long-term equity investments |
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If an
investee company has declared bankruptcy or been in the process of
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reorganization under the supervision
of the court, the equity method may not be applied. |
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However, before the court’s
determination of bankruptcy or reorganization, the gains or |
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losses for the current year shall
still be recognized in accordance with the equity method. |
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Recognition
of gains or losses |
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When an investee
company has net income or loss for the year, an investor company
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shall recognize investment gains or
losses in proportion to its equivalent stock ownership. |
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If an
investor company has significant influence but not control over an
investee |
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company, and if an investor company’s
share of an investee company’s losses equals to |
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or exceeds the carrying amount of an
investment accounted for under the equity |
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method, plus advances made by an
investor company, then the recognized investment |
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losses shall be limited to the extent
that makes the book value of a long-term investment |
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and advances equal to zero. However,
if any of the following conditions is met, the |
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investor company shall continue to
recognize investment losses in proportion to its stock |
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ownership percentage: |
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(a)the investor company intends to continue its support for the
investee |
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company, or |
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(b)an investee company’s losses are temporary and there exists
sufficient |
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evidence showing imminent return to
profitable operations in the near future. |
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Such credit balance on the book
value of a long-term equity investment and advances |
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shall be treated as a liability on the
balance sheet. If an investee company
subsequently |
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reports net income, an investor
company shall resume applying the equity method only |
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after its share of that net income
equals the share of net losses not recognized during |
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the period the equity method was
suspended. |
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Elimination of intercompany
unrealized gains or losses |
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The unrealized profits and losses
from intercompany transactions between an investor
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company and investee company during
the current year shall be eliminated. |
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Differences between investment cost
and underlying equity in net assets
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The differences between investment
cost and underlying equity in net assets should |
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be analyzed and accounted for
according to the related allocation procedures of |
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acquisition cost specified in the
Statements of Financial Accounting Standards No. 25: |
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Business Combinations. If the
differences come from the assets that can be depreciated, |
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depleted or amortized, then an
investor company shall amortize such differences over |
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estimated remaining economic lives.
If the differences come from discrepancies between |
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the carrying amounts of assets and
their fair market values, then an investor company |
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shall offset all unamortized
differences when conditions making such over or under- |
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valuation are no longer present (e.g.,
asset reappraisal or sale of assets). When the |
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investment cost exceeds the fair value
of identifiable net assets acquired, the excess |
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should be recorded as goodwill. When
the fair value of identifiable net assets acquired |
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exceeds the cost, the difference
should be assigned to non-current assets acquired |
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(except for financial assets not under
equity method, assets to be disposed, deferred tax |
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assets, prepaid pension or other
retirement benefits cost) proportionate to their |
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respective fair values. If these
assets are all reduced to zero value, the remaining |
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excess should be recognized as
extraordinary gain. |
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Change in an investee company’s
shareholders’ equity |
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A distribution of cash dividends
from an investee company shall be regarded as a |
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reduction in long-term investments for
an investor company. If stock dividends are |
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distributed from an investee company through retained earnings
or additional paid-in |
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capital, then the increase in the
number of stocks shall be noted in the investor |
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company’s financial statements without
making any journal entry. An investor company |
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should make no journal entry when an investee company appropriates statutory
retained |
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earnings (legal reserve) or special
retained earnings (special reserve). |
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Impairment of long-term equity
investment |
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An investor company should evaluate
whether there are indications that an individual |
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long-term equity investment for an
associate company has been impaired on the balance |
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sheet date. If there are
objective evidences that it has been impaired, an investor |
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company should follow the rules
specified in the Statements of Financial Accounting |
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Standards No. 35: Impairment of Assets
to compute the impairment loss for the individual |
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investment, by comparing its
recoverable amount with its carrying amount. |
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Losing significant influence or
control over investee company |
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If an investor company loses its
influence over an investee company because of a
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decrease in ownership or other
reasons, it shall cease using the equity method to |
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account for the investment.
Instead, it should follow the rules specified in the |
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Statements of Financial Accounting
Standards No. 34: Financial Instruments: Recognition |
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and Measurement. The new cost of
investment will be the carrying amount of the |
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investment at the time of change. |
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This Statement also specifies
disclosures about long-term investments under equity |
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method.
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Effective
date
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This most recent revised Statement
becomes effective for financial statements for the |
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fiscal year beginning on and after
January 1, 2006. Earlier adoption is not allowed. |
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